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Q&A on Distribution Agreements

Part 1: Legislative framework

Q1. Please specify the legislative framework generally applicable to the conclusion and execution of distribution agreements (a)? Please include a link to the official publication of the applicable rules (e.g., relevant link to the Official Gazette) (b) and, if available, to the English translation of the legislative framework (c).

a.  Legislative framework:

Distribution agreements are regulated by:

  • Contract Law, Cap. 149 ("Cypriot Contract Law")
  • Protection of Competition Law (Law 13(I)/2008) ("Cypriot Competiton Law")

b. Link(s) to official publication:

  • The Greek version of the Cypriot Contract Law is accessible via this link.
  • The Greek version of the Cypriot Competiton Law is accessible via this link.

c. Link(s) to English translation:

  • The English version of the Cypriot Contract Law is accessible via this link.
  • The English version of the Cypriot Competiton Law is accessible via this link.

Q2. Other than for agency agreements pursuant to Directive 86/653 (EEC) on the coordination of the laws of the Member States relating to self-employed commercial agents, are there specific rules depending on the distribution format (e.g. franchising, exclusive distribution)?

No.

Q3. Other than general contract law and competition law, are there other rules which may generally restrict the parties when drafting and concluding distribution agreements (e.g., rules in relation to unfair contract terms in B2B contracts, specific requirements in the context of a prohibition of abuse of economic dependence)?

Yes.

If yes, which general rules apply (a)? Where available, please also include a link to the official publication of the applicable rules (b) and to the English translation of the regulatory framework (c).

a. General rules

Art. 6(2) Cypriot Competition Law provides that any abuse by one or more undertakings of a relationship of economic dependence vis-à-vis a client, supplier, producer, representative, distributor or commercial collaborator, which does not have an alternative solution, shall be prohibited, even when this involves a specific kind of products or services.

Abuse of a relationship of economic dependence may in particular be constituted through the imposition of unfair trading conditions, the application of discretionary treatment, or of sudden and inexcusable interruption of long-term trade relationships.

For an abuse of economic dependence to be established, three cumulative conditions must be fulfilled:

  • there must be a position of economic dependence between the two undertakings;
  • the dependent undertaking does not have an alternative equivalent solution; and
  • this relationship has been abusively exploited, which is determined based on weighing the interests of the parties involved.

The abuse of economic dependence is a separate form of anticompetitive behaviour than the abuse of a dominant position (similar to Art. 102 TFEU) and the existence of anti-competitive agreements (similar to Art. 101 TFEU).

b. Link(s) to official publication:

The Greek version of the Cypriot Competiton Law is accessible via this link.

c. Link(s) to English translation:

The English version of the Cypriot Competiton Law is accessible via this link.

Part 2: Pre-contractual phase

Q4. Are there mandatory provisions in relation to the disclosure of pre-contractual information prior to concluding and/or executing distribution agreements?

No. Under Cypriot contract law one cannot have rights prior to the conclusion of an agreement. In addition, there is no general duty to disclose certain information before the conclusion of a contract.

Q5. Is there a standstill obligation linked to the requirements imposed for the pre-contractual phase?

No.

Q6. Does the relevant regulatory framework impose sanctions if the pre-contractual obligations are not (fully) respected?

No.

Q7. Can a party be held liable if it terminates the pre-contractual negotiations?

No.

Q8. Are there other relevant rules and/or restrictions that apply during pre-contractual negotiations between supplier and distributor?  

No.

Part 3: Contractual phase

A. Form of distribution agreements

Q9. Must a distribution agreement be executed in writing to be valid and enforceable?

No, never.

Q10. Are there any (other) requirements as to the form of the distribution agreement for it to be valid and enforceable?

No.

B. Content of distribution agreements

Q11. Other than restrictions imposed by EU competition law (including Regulation (EU) 330/2010), do specific rules and/or restrictions apply in distribution agreements with respect to

  • the territory in which or the customers to whom the goods/services will be sold;
  • an exclusivity granted to the distributor;
  • (exclusive) sourcing/purchasing obligations;
  • resale prices;
  • non-compete clauses

Yes, specific rules apply to (i) (exclusive) sourcing/purchasing obligations and (ii) non-compete clauses.

Any non-compete clause having effect post termination of the distribution agreement is likely to fall foul of Art. 27 Cypriot Contract Law which provides that every agreement by which one is “restrained from exercising a lawful profession, trade or business of any kind, is to that extent void”. There is a basis to argue that non-compete clauses during the contract will not be caught by the prohibition of Art. 27.

In addition, in relation to (i) (exclusive) sourcing/ purchasing and (ii) non-complete clauses, care should be taken not to breach Art. 6(2) Cypriot Competition Law, as explained in Q3 above.

Q12. Do specific rules and/or restrictions apply in distribution agreements with respect to

  • obligations of the supplier vis-à-vis the distributor, including in relation to the remuneration of the distributor;
  • obligations of the distributor vis-à-vis the supplier or vice versa;
  • a non-solicitation clause during and/or after the term of the distribution agreement;
  • minimum sales quota imposed on the distributor;
  • specific sector rules?

Yes specific rules apply to (i) obligations of the distributor vis-à-vis the supplier or vice versa, (ii) a non-solicitation clause during and/or after the term of the distribution agreement; and (iii).minimum sales quota imposed on the distributor.

Such matters may become relevant to allegations of abuse of economic dependence on the basis of Art. 6(2) Protection of Competition Law. 

For example, in Case 22/2018 – Alpha Electric House Ltd v. Fissler GmbH., the Cypriot Commission for the Protection of Competition (CPC) found that Fissler had abused its relationship of economic dependence in violation of Art. 6(2) Protection of Competition Law of 2008 by imposing arbitrary trading terms to its distributor, Alpha Electric. The arbitrary terms that were incorporated into the distribution agreement included, inter alia:

  • a minimum sales quota per category of product imposed on the distributor and a termination clause in case of failure by the distributor to reach the quota without taking into account the possibility of an economic crisis in the market, and
  • a non-compete clause for a period of one year after the termination of the agreement and the imposition of a fine in case of breach of this obligation.

Further, in Case 141/2008 - Paphos Farmers Cooperative Ltd (ΣΥΝ.Ε.ΚΤΗ) v. Athanasis Olymbiou & Sons Ltd, the CPC found that ΣΥΝ.Ε.ΚΤΗ had abused its relationship of economic dependence with Athanasis Farm. It ruled that the way ΣΥΝ.Ε.ΚΤΗ terminated the supply of sheep's milk to Athanasis Farm constituted a violation of Art. 6(2) Protection of Competition Law of 2008 under the circumstances, as it led to the termination of the production of sheep yogurt by the Athanasis Farm, which was their sole activity.

C. Term and termination

Q13. Are there particular rules and/or restrictions in relation to the term (incl. renewal) of distribution agreements?

No.

Q14. Are there any specific rules and/or restrictions with respect to the termination of distribution agreements (e.g. minimum notice period, statutory right to compensation (goodwill or other))?

Yes.

If yes, what do these specific rules and/or restrictions entail (a)? Please include whether these specific rules and/or restrictions differ depending on whether the distribution agreement is of definite or indefinite duration (b) or whether the distribution agreement is terminated by one party for convenience or for breach by the other party (c).

a. What do these specific rules and/or restrictions entail:

In general, there are no formalities that need to be followed in order to terminate a distribution agreement. Parties are free to determine the circumstances in which the agreement may be terminated, as well as the method of the termination, the required notice period, the consequences of termination. Termination rights may be either mutual or unilateral. If a notice period has been agreed upon in the distribution agreement but immediate termination takes place, the general rule is that the aggrieved party shall be entitled to a compensation equal to its expected profits in the period of notice that should have been granted in accordance with the notice period stipulated in the agreement. In cases where there are also other provisions in the contract governing termination which have not been complied with, the aggrieved party may also be entitled to damages that reflect the loss resulting from the contract not being terminated in accordance with its terms.

In the absence of express provisions in the agreement governing termination, a reasonable notice should be granted before termination takes place, assuming of course that the other party has not by its conduct breached the said contract. What constitutes a “reasonable notice” falls within the discretion of the court, having in mind the merits and specific facts of the case as a whole. In general, according to the main authorities on the issue and common law principles, in determining what constitutes a reasonable notice, the court may take into account, amongst others, factors such as the following:

  • The proportion that the supplied products represent in the distributor’s turnover.
  • The total investment made by the distributor in promoting the supplied products and in particular any recent investments.
  • The length of time that the distribution agreement and relationship between the parties has been in place. Generally, the longer the duration of the agreement, the shorter the period of notice must be, but that is not an absolute rule. This relies on the premise that a distributor may have to spend or invest considerable capital at an early stage of the supplier-distributor relationship in order to build up the business and may thereafter run with moderate annual expenditure. As stated in the landmark UK judgment of Alpha Lettings & Neptune Research and Development Inc. [2003] EWCA Civ 704 at 32: “[…] while initial capital investment and business expenses out of the ordinary run of thing may well be relevant to the amount of notice, ordinary and recurring expenditure is unlikely to have much relevance.” See also, Decro-Wall v Practitioners in Marketing [1971] 1 WLR 361.
  • Whether the distributor was allowed to sell competing products.
  • How long it will take the distributor to find an alternative supplier.
  • Whether the distributor has made any recent major investment in relation to the supplier’s products.

In regard to the compensation, no statutory fixed right exists. In general, damages awarded will reflect the average profit per month, multiplied by the period of notice that should have been granted. The amount of the profit per month is a matter of proof and will depend on the evidence presented, including expert evidence.

One needs to also bear in mind the risk of a sudden termination amounting to an abuse of a relationship of economic dependence in breach of Art. 6(2) Cypriot Competition Law. Following the termination of a distribution relationship, an aggrieved party may file a complaint to the Commission for the Protection of Competition and/or file an action for damages in the civil courts relying on that provision. Cypriot law permits follow-on claims in case of a finding of a breach of Art. 6(2) Cypriot Competition Law but also stand-alone claims.

Irrespective of whether express provisions governing termination exist, the aggrieved party may also be entitled to damages in respect of any outstanding breaches at the date of termination, or any losses arising from failure to comply with post-termination obligations expressly provided for in the distribution agreement.

b. If applicable, differences dependent on whether the distribution agreement is of definite or indefinite duration:

In cases where the distribution agreement is of indefinite duration and does not expressly set out the notice period for termination, a reasonable notice period must be granted and compensation will generally reflect the average profit for the reasonable period of notice .

As regards distribution agreements with a  fixed/definite term, it is unlikely that a provision as to termination on reasonable notice will be included in the contract. Indeed, the whole premise of a fixed term contract is that the parties are committed into the relationship for a defined amount of time. In light of this consideration and the fact that the purpose of damages for breach of contract is to put the aggrieved party into the position he would have been in had the contract not been breached, damages awarded to the aggrieved party will reflect the anticipated profits for the remainder of the fixed term of the distribution agreement, subject to general principles of awarding damages such as foreseeability of damages and the aggrieved party’s duty to mitigate its loss. See, case George Charalambous v Kalos Kafes Ltd et al (1997) 1 SCJ 199.

c. If applicable, differences dependent on whether the distribution agreement is terminated by one party for convenience or for breach by the other party:

A distribution agreement of an indefinite term which does not expressly set out the notice period for termination, may be terminated for convenience by either party giving reasonable notice.

In contrast, a right to terminate for breach of contract may arise either (i) pursuant to a right expressly provided for in the contract (for example upon the occurrence of an event) or (ii) under common law principles of contract law which apply to all agreements (unless expressly excluded), according to which such right arises in cases of breach of a condition or a repudiatory breach of an innominate term.

A clause of a contract will be considered a condition if (i) a statute expressly classifies it as one, (ii) a judicial decision has previously classified it as one, (iii) if it is so designated in the contract or if the consequences of its breach (i.e. the right of the aggrieved party to treat itself as discharged) are expressly provided for in the contract or (iv) if the nature of the contract or its subject matter or the circumstances of the case lead to the conclusion that the parties must have intended that the aggrieved party would be discharged of further performance of its obligations in the event that such term has not been fully complied with.

Clauses which are not considered to be “conditions” of a contract may either be “innominate” terms or “warranties”. A breach of a warranty, in contrast with a breach of a condition, does not give rise to a right to terminate, but simply a right to claim damages for breach. In general, where a term cannot be classified as a condition as explained above, and the breach of which may have some serious effects on the contract, it will be classified as an innominate term. A breach of an innominate term will give rise to a right to terminate if it is considered serious enough by (i) depriving the innocent party of substantially the whole benefit of the contract or (ii) going to the root of the contract. The determination of whether a breach met any of those criteria is a fact-sensitive exercise, taking into account, inter alia, the intentions of the parties, the effect of the breach on the injured party, the adequacy of damages as compensation, and the effect of the breach on the future performance of the contract.

In cases of termination for breach of contract, unless expressly provided for in the contract, no obligation to provide reasonable notice exist. In regard to compensation, the basic rule is that the innocent party will be entitled to damages which arise from the breach and which were reasonably foreseeable (Art. 73 Cypriot Contract Law), in order to put it back into the position it would have been in had the contract been performed. The amount of compensation will be assessed in accordance with the general common law principles of awarding and quantifying damages, which can be a particularly complex exercise.

Even though it is possible for the parties to include a liquidated damages clause providing the amount to be paid as compensation in case of breach of contract, in contrast with English law, pursuant to Art. 74 Cypriot Contract Law, such clauses are unenforceable, except insofar as they operate as a cap on the maximum amount of compensation that the innocent party can recover for the actual losses they can show.

As a result, under Cypriot law, liquidated damages clauses do not function as enforceable provisions requiring the payment of such damages, unless the innocent party can independently establish actual damages and not exceeding that amount flowing from the breach of the contract In other words, if the innocent party independently establishes actual damages, the existence of a liquidated damages clause in the distribution agreement will hinder it from recovering an amount exceeding the one expressly provided, regardless of whether the clause expressly states that such amount will operate as a cap or not.

In cases where the innocent party is unable to prove any losses flowing from the breach, they will only be entitled to nominal damages, as a means of recognition of the infringement of their rights.

Q15. Is it possible to terminate the distribution agreement based on certain grounds for termination (breach or other) included in the distribution agreement?

Yes.

If yes, is prior judicial intervention required in order for the termination of the agreement to take effect?

No.

Part 4: Post-contractual phase

Q16. Is the supplier required to repurchase the stock that is still at the distributor’s disposal when the distribution agreement ends?

No.

Q17. Are there other post-contractual obligations that generally apply to either of the parties in the context of the termination of the distribution agreement?

No.

Part 5: Dispute resolution

Q18. Do specific rules and/or restrictions apply as regards the choice of forum and/or jurisdiction?

No.

Q19. Can the parties opt for arbitration?

Yes.

If yes, are there any rules and/or restrictions as regards the enforceability of arbitration clauses in distribution agreements?

No.

Q20. What is the statute of limitations applicable to claims regarding the performance of a distribution agreement?

According to Art. 7 Limitation of Actionable Rights Law of 2012 (Law 66(I)/2012)), any action based on a contractual claim must be brought before a court within 6 years from the day of completion of the basis of the claim. The “basis of the claim” is defined in Art. 2 of said Law as “all events that give rise to an actionable right concerning a claim”.

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